Forex: RBA Leads The Way

Market sentiment has been buoyed this morning after a surprise 25bp rate hike from the RBA overnight and the hawkish summation of the global recovery going forward. The move was very much ahead of the market consensus for a first hike in November, and underscores our view that the AUD will be a leading performer as the Australian economy returns to trend growth.

The Australian central bank statement noted that it was no longer necessary to maintain “such a low interest rate setting”, and that it would be “prudent to begin gradually lessening the stimulus” of loose monetary policy; pointing to more hikes to come in Q4 09/Q1 10.   Even before the RBA surprise, Asian equity markets found support from the improvement in yesterday’s ISM non-manufacturing index, and the deterioration in the DXY today (76.35) lends credence to our theory that good US data is likely to have a far more marked effect in encouraging USD-selling than good US data on encouraging USD-buying.

Today’s data calendar remains light; the main release of the morning has been Swiss CPI which remained flat on the month against expectations of a 0.1% increase. These numbers are likely to be closely monitored as the SNB remains wary of the threat of deflation. Given the rapid resumption of CHF strength since the alleged intervention last week, this release may ensure that the SNB remain committed to enforcing a weak CHF, and we would repeat our strategy of going long EURCHF around current levels (1.5100) in anticipation of further verbal or physical intervention to come. This strategy should however be taken with some caution, as clearly the market is at odds with the central bank in this instance on where the CHF should be trading, and with every passing day the improvement in the global outlook will lessen the need for the central bank to weaken the CHF.

UK Industrial Production numbers posted a dismal -2.5% MoM in Aug versus forecasts for a 0.2% rise, and there were revisions lower to last month’s figures (0.7% from 0.9%). Manufacturing Production figures were just as disappointing; -1.9% MoM (0.3% expected), causing the GBP to drop heavily to 1.5940. We see further downside for the currency as the deterioration in the economy persists in contrast to its G10 peers.

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